GM Rebound Bodes Well for IPO

MOTORS' STRONG SECOND-QUARTER results, reported Thursday, underscored the auto maker's financial recovery since it emerged from bankruptcy protection last year, and set the company up for what may be the splashiest initial public offering of 2010.

GM earned $1.3 billion after taxes, better than the $900 million it netted in the first quarter. It is expected to file the prospectus this week for its IPO, which could come in October.

An IPO before the November elections could pay political dividends for President Obama, who has been trumpeting the success of the government's $50 billion bailout of GM as a huge job saver and a smart investment for taxpayers.

Barron's highlighted GM's progress earlier this year in a cover story ("GM Is Back on Track," March 1), when few were focused on its revival. We predicted its equity value could top $50 billion, which now appears likely, barring a collapse in the markets before the IPO.

The debt of the old GM, due to be exchanged for stock and equity warrants following the IPO, trades for about 35 cents on the dollar, up from under 30 cents in March. The bonds are the only way for investors to play the new GM. The company's old common stock,
Motors Liquidation
(MTLQQ), trades for 43 cents, and likely will have little or no recovery value.

Current GM bond prices imply GM will have an equity value of more than $60 billion. The most liquid debt is the 8 3/8% issue due in 2033. The company also issued several convertible bonds with a $25 face value; they trade around 8, or roughly 32 cents on the dollar. GM isn't saying much about its IPO, but reports have put the size as high as $15 billion, with the government potentially selling $10 billion or more. The Treasury now owns 61% of GM's equity, which could be worth more than $30 billion.

GM has some valuable assets, including a stake in several joint ventures in China, as well as $32.5 billion of cash. Among its liabilities are a sizable pension deficit of $26 billion and debt and preferred stock totaling about $17 billion. Its complex financial structure, uncertain outlook and an incoming CEO, Daniel Akerson, with experience in telecommunications, but not autos, could make it difficult for Wall Street underwriters to set a price on the IPO.

-- Andrew Bary

With Help From China, BMW Is on a Roll

"Sheer Driving Pleasure" is a BMW sales slogan, but "Sheer Investing Pleasure" would work just as well for the German luxury-auto maker. The company's Frankfurt-traded shares (ticker: BMW.Germany) hit a new three-year high of 45.38 euros recently after BMW reported second-quarter sales and profit far ahead of expectations. The shares are up 32% year to date, and could rally another 20% or so in the next 12 months as the company drives home impressive results. BMW's American depositary shares (BAMXY) ended the week at 17.76, up 17% this year.

BMW benefited in the latest quarter from booming sales of luxury vehicles in China, and currency translation that swung in the company's favor. Revenue rose 18.3%, to €15.4 billion ($19.6 billion), on a 12.5% increase in unit sales, concentrated in Series-5 sedans and X-5 sport-utility vehicles. Net earnings jumped more than sevenfold, to €834 million, the biggest quarterly profit since 2006.

Don't credit Chinese demand or currency swings for all the growth, however. "BMW owes some of this swift recovery to its own actions," says Max Warburton, a London-based auto analyst with Sanford Bernstein, who notes the company was "one of the most aggressive in cutting headcount" as auto sales slid in the past two years.

In addition, says Warburton, BMW has gone further than other luxury-car companies in updating its model line quickly "without boosting research-and-development costs excessively."

DEMAND FOR LUXURY AUTOS is rising globally, though it is most apparent in China, the world's biggest auto market. BMW expects its China sales to rise 30% this year, while Daimler-Benz's Mercedes unit and Audi (NSU.Germany) also look for big gains. Daimler (DAI.Germany) recently posted second-quarter net of €1.31 billion, compared with a year-ago loss of €1.06 billion. Audi, too, saw gains in quarterly earnings.

All three companies reported gross margins of more than 9%, well above expectations. They are helped by a weaker euro relative to the dollar and Chinese renminbi, which effectively is pegged to the buck. Earnings generated in both the U.S. and China are inflated when converted to euros.

SOME INVESTORS SOLD BMW shares after the company released its latest numbers. But these sales, which left the stock just above the level at which it traded in the fall of 2007, when Barron's penned a positive cover story on the company ("Green Machine," Sept. 24, 2007), seem premature. Even though sales in China are expected to weaken in the second half, the company continues to recover from a severe bear market for the auto industry in 2008 and '09. Warburton and others look for earnings and the share price to accelerate in the next 12 months.

BMW CEO Norbert Reithofer reiterated in conjunction with the earnings release that BMW aims to "achieve significantly higher group earnings in 2010 than in 2009, thus making an important step toward achieving the targets we have set for 2012."

With BMW's stock selling for only about nine times next year's earnings estimates and 7.5 times 2012 forecasts, investors ought to set higher targets, too.

-- Jay Palmer

Sara Lee: There's More in the Oven

THE FISCAL YEAR THAT ENDED July 3 was bittersweet for
Sara Lee.
Although the consumer-products company made good progress toward streamlining its businesses, selling major pieces of its household and body-care division and buying back shares, Brenda Barnes, the CEO who engineered the company's restructuring, resigned last week to recover from a stroke.

Despite Barnes' absence, Sara Lee's (ticker: SLE) makeover is on course to advance to the next stage, after yielding notable earnings gains to date. Shares, too, are up 22%, to 14.55, since Barron's lauded the company's redesign last winter ("From Sara Lee, Oven-Fresh Shares," Jan. 25). They could keep rising, to 18.

Under interim CEO Marcel Smits, a possible successor to Barnes, Sara Lee will be putting more marketing muscle behind its higher-margin meat brands such as Jimmy Dean and Hillshire Farm, as well as its international coffee business. It also plans to buy back $1 billion to $1.5 billion of stock in fiscal 2011, and reduce costs by an annualized $350 million to $400 million by the end of fiscal 2012.

The company just reported a profit of 19 cents a share, excluding one-time items, for its fiscal fourth quarter, ended July 3, missing expectations in part due to heavier marketing expenses. But the future looks brighter. Smits expects most of Sara Lee's businesses to be profitable in fiscal 2011, with earnings growing 16% to 25%, to a range of 88 cents to 95 cents, up from 76 cents adjusted for continuing operations. Buybacks, cost savings and accounting items could contribute another 15 cents to 20 cents of earnings in fiscal 2012.

"What is really driving us is our ability to drive through price increases," Smits told Barron's. C.J. Fraleigh, head of the North American retail and foodservice, discounted recent speculation the company would sell its bakery business, saying "we have significant opportunity relative to the competition."

James Lane, a private investor in New Jersey and former portfolio manager for Boston hedge fund TRI, thinks Sara Lee could fetch at least $18 to $19 a share in a takeover. He cut his position as the stock rallied, but sticking with Sara Lee might yet prove sweeter.

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